Over the next year, companies could wind up spending some serious dollars to determine the fair value of intangibles and business units.
Such valuations are required in FASB’s new merger rules, which require that goodwill and other intangibles be tested for impairment rather than regularly amortized.
The standards become effective for companies at the start of their fiscal year and the first step of the impairment test must be completed within the first six months of adoption.
FASB will provide further guidelines on the implementation during the standards’ final issuance in late July, but senior financial executives may want to budget for the hefty expenses ahead of time.
Why? Just ask John Steuart, CFO of Mypoints.com, who went through the old impairment test last year with the company’s acquisitions of CyberGold. “The impairment work that we did at MyPoints.com added 25 percent to my total annual budget for accounting fees,” he tells CFO.com.
The cost, he says, quickly adds up because the valuation work is only one part of the equation. The assessment also has to be signed off by outside auditors, who have high fees. There are also legal costs, outside accounting firm charges, and internal staff to compensate for their time on the project.
Those charging the high fees have their own explanations. Simply put, valuing intangibles such as brands is not simple because the process is inherently subjective. “In the intangible asset world, the ability to get readily available information of fair value is greatly diminished,” says Brian Heckler, national partner in KPMG’s transaction structuring services, who believes management will incur “significant additional costs to implement the standard.”
Of course, fees will vary. Alfred King, chairman of Valuation Research, says that a benchmark assessment would cost companies between $15,000 and $20,000 per reporting unit, “based on my understanding of the work required and how much we charge for comparable work not related to FASB.”
Jim Schnurr, senior partner in Deloitte & Touche’s M&A group, says the price is not so cut and dry. Rather, the cost for valuation services often depends on how complex the business or reporting unit is and how many different types of intangibles would need to be valued separately. “The larger the business unit that is being evaluated, the more it would cost,” he says.
What’s more, companies can have several reporting units to perform benchmark assessments, and ultimately impairment tests.
Moreover, Schnurr says the second step of the impairment test — if needed — would be a more costly analysis than in the first step, in which a company calculates the overall (or fair) value of the reporting unit. If the fair value of the unit is less than its book value of its assets minus its liabilities, there is impairment.
In the second step, companies determine the size of the impairment loss, which requires spreading the fair value of goodwill to each of the reporting unit’s assets and liabilities. FASB also requires that some identifiable intangible assets separate from goodwill, such as trademarks and customer lists, be tested for impairment like goodwill.